Excerpt:.....finding is clearly vitiated. the finding, as already stated above, by me, is clearly vitiated. commissioner of income-tax, where it was observed :in a reference the high court must accept the findings of fact made by the appellate tribunal, and it is for the persons who had applied foe a reference to challenged these dining first by an application under section 66(1). if he has failed to file an application under section 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before high court that the finings are vitiated for one reason or the other. at the mandamus stage, the petitioner wanted the following three questions of law which, accordingly to them, arose out of the tribunal order dated january 9, 1962, to be referred to..........salary mohammed sail v. commissioner of income-tax :'the income-tax appellate tribunal is fact-finding, tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before, it the court will not interfere. it is necessary, however, that every fact for and against the assessee must have been considered with due care and the tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the finings reached on the evidence on record before it. the conclusion reached by the tribunal should not be collard by any irrelevant considerations or matters of prejudice and if there are any irrelevant.....

Judgment:

P. C. PANDIT J. - Sarwan Singh was carrying on cloth business under the name and style of Rattan Cloth House and he was assessed as an individual up to the assessment year 1957-58. On 4th of April, 1957, accordingly to him, he divided his entire capital amongest himself and his there sons, namely, Ranjit Singh Dalip Singh and Gurcharan Singh in equal shares. Thereafter, on 8th of April, 1957, a partnership deed was executed and the business was covered into a partnership business with effect from 5th of April, 1957. At the close of the financial year 1957-58, profits according from the business were credit to the individual accounts of partners in proportion to their respective shares. On September 12, 1957, an application for the registration of this firm under section 26A of the Indian Income-tax Officer. On 1st of April, 1958, Dalip Singh let the partnership, as he had gone to Bombay to join service with the result that the new partnership deed was drawn up by the remaining partners on 23rd of July, 1958. Registration of this changed firm also was claimed for the assessment year 1959-60 for which an application was filed on September 22, 1958. By means of two separate order dated November 14, 1959, the Income-tax Officer refused to register these firms. He was of the view that the division of the capital and the commencement of the partnership concern was all a made-up affair and it had been done to get the benefit of registration. In case Sarwan Singh had made up his mind to distribute the capital amongest himself and his sons, he should have done so by exacting a regular deed and the signatures of some withness should have been obtained thereon and not merely by a writing on one of the page of the bahi which belonged to him. According to the Income-tax officer, the sons of Sarwan Singh were joint with him and no actual division of the assets had taken place. When the matter came before the Appellate Assistant Commissioner, he, by means of a consolidated order dated July 26, 1960, allowed the appeals and directed that the firms be registered for both the assessment year. With regard to the assessment year 1958-59, he found that the firm was registered with the Registrar of Firms on October 17, 1957, and towards the end of the year, there was also a division of the profits amongst the partners. He did not agree with the Income-tax Officer that the division of assets by the father should have been effected by a regular deed. He also found that the individual expenses of all the partners had been debited to their personal accounts. As regards the assessment year 1959-60, he observed that the partnership was also registered with the Registrar of firms and Dalip Singh, the outgoing partners, had been paid his dues up to January 26, 1960. Against the order of the Appellate Assistant commissioner, the Income-tax Officer went in appeal before the Appellate Tribunal which set aside the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer by means of its order to his sons, the so-called partner from the partnership and utilised the same for the repair and reconstruction of his own not genuine and, therefore, the book of accounts and held that the firm was not genuine and, therefore, the registration had been rightly disallowed by the Income-tax Officer. Thereafter, application under section 66 (1) were made before the Appellate Tribunal on March 31, 1962, respecting it to draw up a statement of the case and refer certain questions of law arising out of its order dated January 9, 1962, to this court of decision. The Tribunal dismissed these applications, vide its order dated August 21, 1962. Two applications under section 66 (2) of the Income-tax Act were then filed in this court for a mandamus directing the Tribunal to refer the said questions of law to this court. These application were accepted on July 13, 1965, by Bench of this court and they directed the appellate Tribunal to state the case and refer to the following question of law for the decision of this court :

'Whether, on the facts and in the circumstances of the case, the partnership should been registered by the income-tax authorities under section 26A of the Income-tax Act ?'

That has led to this reference.

The Appellate Tribunal came to the conclusion that the partnership was not genuine and, therefore, the registration was rightly disallowed by the Income-tax Officer. Learned, counsel for the revenue contented that the fining whether a particular firm is genuine or not is a finding of fact and, in a reference under section 66 of the Income-tax Act, this court could not interfere with the finding of fact arrived at by the Tribunal, unless it came to the conclusion that there was no material or evidence which would justify the finding. In the instant case, according to the learned counsel, there was evidence, in support of this fining and, consequent, this court was debarred from interfering with the same.

In the present case the assessee had led evidence to show that up to the assessment year 1957-58, Sarwan Singh was the so owner of the business and his status was that of an individual. On 4th of April, 1957, he divided his entire capital amongst himself and his three sons and the relevant entries to that effect were made in the books of accounts. Regular partnership deed was also exactitude on 8th of April, 1957 and with effect from 5th of April, 1957, the business became a partnership business. The profits accruing from the business, after the close of the year, were credited to the accounts of the respective partnership Act. After Dalip Singh left the partnership, a fresh partnership came in to existence between the remaining partnership and a deed with regard to the same was drawn up on 23 July, 1958. This firm was also registered under the Indian partnership Act. Dalip Singh had been paid his dues up to January 26, 1960 and the entries in the books of accounts shown that he had taken Rs. 3,420 70 nP. in cash on three different occasions and Rs. 4,000 were paid on his behalf to Sarwan Singh on loan. Four promissory notes for Rs. 1,000 each written by Sarwan Singh in favour of Dalip Singh were also produced. The receipts under the promissory notes further shown that the money due under them was paid back to Dalip Singh by Sarwan Singh on various dated. But while dealing with his evidence, the Appellate Tribunal in its order dated January 9, 1962, observed thus :

'In a matter like this, when the enquiries were directed towards the guanines of the firm, we have to sift the entries evidence and examine that position in order to funded out whether the relationship between the parties to the deed is that of partners or something else in view of the close family relationship. It is true that the assessee has been zealous to serve the formalities and, if we may say so, he has been far too zealous. We are of opinion that the very pronotes which were sought to be place before to us for the first time betray the assessees case. The naked facts as they appear from the books are that Sarwan Singh obtained the money which was due to has son and so-called partner, Dalip Singh, and utilised them in the repair and reconstruction of his own house. In other words, it is case where the money due to one partners is taken by another. The partnership, therefore, fails by the first test of guanines viz., whether the profits have been enjoyed by the partners who are alleged to be partners. After a careful scrutiny of the facts on the record. (we have gone through the account books out selves), we are of the opinion that the Income-tax Officer has right doubted the guanines of the firm. As we re satisfied that the firm is not genuine we consider that registration was rightly disallowed by the firm is not genuine we consider that registration was rightly disallowed by him and the Appellate Assistant Commissioner went wrong in accepting the assessees case.'

Thus, it would be seen, and this was also the position of the learned counsel for the revenue, that the finding of the Tribunal to the effect that the firm was not genuine, was based on the following three consideration :

(1) The promissory notes which were sough to be placed before the tribunal for the first time betrayed the assessees case;

(2) The book of counts showed that Sarwan Singh obtained the money which was due to his son, Dalip Singh, and utilised it in the repair and reconstruction of his own house, that is to say the money due to one partner was taken by another which showed that the profits had not been enjoyed by the alleged partners; and

(3) A perusal of the account books by the Tribunal proved that the Income-tax Officer had rightly doubted the guanines of the firm.

So far as the first consideration is concerned, it would be seen that the tribunal had not side anywhere that the promissory notes were faked. All that not said to air they betrayed the assessees case. It is not made clear in what manner they did so. It is not early understandable as to what was in the mind of the Tribunal when they used this expression. If it was their feeling that these promissory notes were all made up in order to give to collate of guanines to the entire transaction, then they have given no reason whatever for drawing this. Similarly, under the third consideration, no definite finding has been given that the accounts books were false. What is mentioned is that their perusal showed that the firm was not genuine. Even if it be assumed that the Tribunal was of the view that tall the accounts were fabricated, no reason have been given by them for coming to this conclusion. It is not said which particular entry or entries were not believed by them and which, according, to them showed that the whole thing was not genuine In my opinion, it was not enough for the Tribunal simply to say that after going through the accounts they came to the conclusion that they were all false or for that matter that the firm was not genuine. It is necessary for a judicial tribunal or even for a quasi-judicial tribunal to give reasons for their decision, especially when they re setting aside the orders of their subordinate tribunal. Even when the subordinate tribunals order is confirmed, the Appellate Tribunals order must shown that they have greed with the reason given by that Tribunal. It was observed by the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas and Co. :

'In a reference under section 66, finding given by the Tribunal is considered final and the High Court accepted it without examination of the material. The High Court does not hear an appeal but answer certain questions of law in the light of the facts proved. If finding is final in this way one does expect that the reasons for reaching it will at least be stated with sufficient fullness to inform all concerned what they were. Even if the reason given by an inferior tribunal are not restated at least a general approval of them or such of them as are acceptable should appear.'

Coming to the second consideration, the profits accruing to Dalip Singh were credited to this personal account. Part of them were drawn by him in cash and the rest were taken by his father on loan from him by executing promissory notes in his favour. Subsequently, this loan also was paid of. At any rate, the manner in which lay partner deal with the share of his profits is not relevant to determine the validity or the guanines of the partnership. It was held by the Supreme Court in Commissioner of Income-tax v. Sivakasi Match Exporting Co. that a partner of a firm could secure his capital from any course or surrender his profits to his sub-partners or any other persons these facts, accordingly to the Supreme Court, could not conceivably convert a valid partnership into a bogus one. It was also observed in that very authority that the manner in which a partner death with the share of his profit was not of any relevance to the question of the validity of the partnership.

From what has been above, it would be apparent that one of the considerations, namely, the second one, was absolutely irrelevant for determining the guanines of the firm. As regards the remaining two, as already mentioned above, in the first place, the precise findings of the Tribunal are not clear and, secondly, no reasons had been given for raving at those conclusions, and consequently, such conclusions had no validity in law. It appears that the Tribunal away influence by the fact that the partners of this firm were no other than the father and his sons and because of this close relationship the Tribunal approached the neither case with a beside mind and with suspicion. Accordingly to the Tribunal, the assessee has observed all the formalities, and curiously enough, this was point which was taken against it, because it is said in their order that the assessee had been too zealous to observe the formalities. The finding of the tribunal appears to be based on mere suspicions and surmises. It has been observed by the Supreme court in Omar Salary Mohammed sail v. Commissioner of Income-tax :

'The Income-tax Appellate tribunal is fact-finding, Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before, it the court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the finings reached on the evidence on record before it. The conclusion reached by the Tribunal should not be collard by any irrelevant considerations or matters of prejudice and if there are any irrelevant considerations or matters of prejudice and if there are any circumstances which require to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures, or surmises; nor should it act one on evidence at all or on improper rejection material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sport, its finings even though lion questions of fact will be liable to be set aside by the court.'

It was contended by the learned counsel for the petitioners that if a finding of fact given by the Tribunal laws based on materials partly relevant and partly irrelevant, then finding was as in law. In that connection he referred to the diocesan of the Super Court, in Dhirajlal Girdharilal v. Commissioner of Income-tax, where it was held that when a court of fact acted in material, partly relevant and partly irrelevant, it was impossible to say to what extent the mind of the court was affected by the irrelevant material used by the it in arriving at its finding such a finding was vitals because of the use of inadmissible material. This decision was, later on, referred to with approval in Omar salary Mohamed Saits case mentioned above.

Learned conceal for the revenue, on the other hand, referred to there decision (Homi Jehangir Gheesta v. Commissioner of Income-tax, Bhaichand Amoluk Co. v. Commissioner of Income-tax and National Syndicate v. Commissioner of Income-tax, the first two by the Supreme Court and the third by a Bench of the Bombay High court and submitted that if a finding fact of the Bombay High Court land submitted that if a finding of fact of the Tribunal was based on three piece of evidence and only two out of them were held be irrelevant, still the finding could not be interfered with, since it was based on some legal evidence, namely, the third piece of evidence. I have gone through these there authorities but in may opinion, they do not strictly support, the proposition of law urged by the learned counsel. The two supreme Court decisions have nowhere disagreed with the law laid down in Dhirajlal Girdharilals case which was subsequently approved in Omar salary Mohamed Saits case As a matter if fact in the Homi Jehangir Gheestas case, it had been specifically mentioned thus :

'Having examined the powder of the Tribunal and those material we, are unable to agree with learned counsel for the appellant that the order of the Tribunal is vitiated by any of the defect adverted to in Dhirajlal Girdharilal v. Commissioner of Income-tax or Omar Salay Mohamed Sait v. Commissioner of Income-tax.'

These observations clearly show that the learned judges were, in a way approving the earlier two decision. This apart, as I have held above, in the present case, none of the three considerations relied on by the Appellate tribunal could form the proper basis for the finding given by it.

In view of what I have said above, I am of the opinion that there was no legal evidence in support of the finding of the Tribunal that the firm, in the instant case, was not genuine. That being so, that finding is clearly vitiated.

It was observed by the Supreme court in Commissioner of Income-tax v. Sivakasi Match exporting Co. that the jurisdiction of the Income-tax Officer, under section 26A of the Income-tax Act, was confined to ascertaining two facts, namely, (i) whether the application for registration was in conformity with the Rules made under the Act, and (ii) whether the firm shown in the document presented foe registration was a begun one or has no legal existence. In the instant case, the Tribunal, has not said that the application for registration was not in conformity with the rules made under the Act. It had also not found that the firm had no legal existence. The registration had been refused because, it was found by the Tribunal that the firm, was not genuine, that is to say, that it was a bogus one. The finding, as already stated above, by me, is clearly vitiated. That being so, the Tribunal had erred in law in reversing the order of the Appellate assistant Commissioner and restoring the order of the Income-tax Officer by which the registration was refused.

The answer to the question of law referred to us should, therefore, in my opinion be in the affirmative. There would be no order as to costs.

Before concluding, I may notice one other argument raised by the learned counsel for the reinvent. He submitted that on the question referred the argument that the finding of the Tribunal to the effect that firm was not genuine was based on no evidence, was not available to the petitioners. In this connection he referred to the Supreme Court decision in Indian Cement Ltd. v. Commissioner of Income-tax, where it was observed :

'.......... in a reference the High Court must accept the findings of fact made by the Appellate Tribunal, and it is for the persons who had applied foe a reference to challenged these dining first by an application under section 66(1). If he has failed to file an application under section 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before High Court that the finings are vitiated for one reason or the other.'

There is no merits in this contention. At the mandamus stage, the petitioner wanted the following three questions of law which, accordingly to them, arose out of the Tribunal order dated January 9, 1962, to be referred to this court :

'(1) Whether there was any material before the Tribunal for the finding that the profits of the previous years had not been enjoyed by the alleged partners of the firms ?

(2) Whether there was evidence to hold that the partnership constituted by deed dated April 8, 1957 (July 23, 1958 in the connected case) was not genuine ?

(3) Whether, on the facts, and in the circumstances of the case, the partnership, should have been registered by the income-tax authorities under section 26A of the Income-tax Act ?'

A Bench of this court then referred only one question, namely question No. 3 on the view that question No. 2 would also be covered by this, one, because otherwise there was no point in referring even question No. 3, if the finding that the firm was not a genuine one, was not to be interfered with. If a firm is a bogus, one, then under no circumstances, can it be registered under section 26A. The case of Indian Cements Ltd. is of no assistance to the revenue, because in the instant case, an application under section 66 (1) was made challenging the validity of the finding regarding the guanines of the firm given by the Tribunal. That application had been rejected by the Tribunal and the petitioner then moved this court under section 66(2) for the very relied which was granted by this court.